Subprime Lending or Options Backdating, Which Will Receive a Legislative Haymaker?

Recently, the financial industry and the country itself has faced two sweeping market-related “scandals” or “crises” (for lack of a better term): the issues in the mortgage industry with subprime lending, and the executive stock option backdating situation. Both of these scandals will likely prompt legislation; I am curious as to which will engender the most profound legislative response.

The subprime mortgage lending crisis became personal for me recently. A few years ago, I reconnected with a friend from my college years – he married a woman who, coincidently enough, was friends with my wife during her misspent youth, so it was very easy to fall right back into our friendship, becoming closer than ever. After the first of the year, my friend lost his job in the mortgage industry due to downsizing, and can’t find another as the industry isn’t hiring. As a result, my friend was forced to sell his house and move in with his in-laws while he looks for work and regroups.

I am not the only person with a tale like this. The subprime crisis has landed on a lot of doorsteps, both literally and figuratively, and the news media has definitely picked up the story. Contrast this situation with the options backdating crisis, which involved well over 100 companies and perhaps half that many corporate officers. Yet backdating has been, for the most part, sequestered to the financial news world. In his Expert Commentary on the crisis, James Fanto on Stock Option Backdating and Its Implications for Firm Governance, the author notes that the backdating scandal has not generated much public outrage, and finds this outcome to be “curious.”

Perhaps this development is not so curious. There is nothing in options backdating for the mainstream media to glom on to, what they call “good copy.” Very few people, if any, have lost their homes because officers at Broadcom Corp. may have received creatively dated options as part of their comp packages. This could be why backdating remains a niche story while subprime gets major ink and TV face-time.

Recall the insider trading scandal of the mid 80s which, to be fair, did enter the media mainstream somewhat (Oliver Stone’s entertaining but flawed film Wall Street comes immediately to mind). Still, my recollection is that insider trading never engendered any widespread outrage. As far as the general public was concerned insider trading primarily amounted to rich young men in matching paisley tie and suspender sets stealing from even richer old men who were managing cash-bloated companies from the back nine.

Now think back to the corporate fraud scandal of the early 2000s (not an overly difficult mental exercise there, to be sure) particularly the situation at Enron. As a result of mismanagement and worse at Enron, employees lost pensions accrued after decades of hard work, and California suffered some unnecessary rolling blackouts. As with the subprime situation some seven years in the future, the media had their good copy. Because of the “Regular-Joe-and Jane” angle, Enron, Adelphia and their corporate ilk jumped from the financial section to the front page.

So what does this all mean? Well, at the risk of sounding cynical, once the media latches on to a story, politicians often join the parade in full voice, waiving coffee-stained, handwritten legislation and yelling into big college cheerleader-style megaphones. And while there was congressional action following the insider trading scandals (the Insider Trading and Securities Fraud Enforcement Act of 1988 for example), such legislation was not nearly as broad and sweeping as what followed Enron: the Sarbanes-Oxley Act of 2002. Using history as a bellwether, I expect subprime lending, the situation getting the most mainstream media attention, to engender a broader legislative response than options backdating. In fact, a search of the LexisNexis “Congressional Record, All Congresses Combined” database turned up the legislative record for the proposed Mortgage Reform and Anti-Predatory Lending Act of 2007, 153 Cong Rec H 13978*. That record indicates that Representative Price from Georgia quoted the Wall Street Journal as saying that the Act in debate was a "Sarbanes-Oxley for housing, an attempt to punish business in general for the excesses of an unscrupulous few."